May 1, 2013
Why Your Perfect Pricing Strategy Sucks

An unfortunate misconception that we hear almost every single day is that there’s some mythical holy grail of pricing out there. Somehow your extraordinarily differential product and numerous customer personas will magically boil down to one silver bullet of a price that makes the entire C-team happy and your P&L statements bleed black.

Well, with over 100,000 pricing studies completed we’ve definitely learned one thing: there is no, one perfect price. We’ll give you a second to let that sink in for a moment, especially given the irony that we’re a price optimization company.

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The good news is that this mythical perfect price wouldn’t maximize profits anyway. So how will your business generate more profit from your customer base if you charge different prices for the same core product? The answer is using what’s known as a multi-price mindset, which, when used effectively, helps your business profit from every customer’s perception of value. Let’s discuss what exactly this mindset is and break it down into three main strategies that your business can use to grow and increase profits.

What is the multi-price mindset? More prices = more revenue.

The multi-price mindset is an adaptable approach to pricing that generates more profit from your customers by appealing to their different perceptions of value. Rather than selling a product at a fixed price, a system of strategies is used to match prices and promotions with the diverse needs of your customers. With a multi-price mindset you’ll be able to capitalize on those who are willing to pay more for your product while widening your customer base. Essentially in terms of implementation, different packages and prices appeal to different customers, and using a range of optimum, value-based prices culled from customer data can help your business take advantage of different valuations and increase revenue.  

So what are the strategies? The three most important methods of the multi-price mindset are differential pricing, bundling, and segment-based pricing. We’ll define all three and show how you can reap the rewards for your own business.

1. Differential Pricing: Price your product to match value

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Price differentiation is the art of selling the same product for different prices to different customer personas. Prime examples would be student discounts for admission to a museum, or coupons that customers clip and redeem at the local grocery store. These discounts are meant to identify customers with different valuations, including those who are willing to pay more (those consumers, like me, who are too lazy to clip coupons).

The use of time in price differentiation is a great way to capitalize on customers who are willing to pay higher prices. If part of your customer base is willing to pay premiums on the latest version of your product just to be the first ones to have it, then your price should reflect that higher valuation. A product’s initial release is a great time to maximize profits, and prices can be discounted later to appeal to thriftier customers who were willing to wait (for example: every Apple release... ever).

Another great way to use differential pricing is to price along a value metric. Not everyone can afford your product, but more importantly, not everyone needs the entirety of your product. As such, break things down after identifying what your value metric is, and make sure that customers are able to buy your product at different stages in their cycle of need. A great example of this is Wistia, where companies big and small have options for video hosting. The great externality of this setup is that Wistia creates customers for life, as small folks simply buy more from Wistia as they grow.

2. Bundling: As simple as Base, Plus, and Premium

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Price bundling is the strategy of selling different but similar versions of a core product for different prices. You’ve experienced this part of the multi-price mindset anytime you’ve purchased a lite or deluxe version of a piece of software. The idea behind this versioning is that adding and subtracting features to a product and pricing accordingly will enable you to earn revenue from frugal customers as well as more affluent ones.

Your company can develop options that tier your product and appeal to different price points, and chances are spreading the love won’t cost you nearly as much as developing the core commodity of your business. Premium versions of your product that include extras and bonus features can have high profit margins if a solid pricing strategy is implemented, and the stripped down version will attract new customers that can’t afford the fancier one.

By creating these opportunities to pay a different price for similar choices, you’re more likely to appeal to every potential consumer’s sense of value, thus increasing your profits. This is really similar to pricing along a value metric (discussed above), but is used more for products that are feature differentiated, such as Litmus.

3. Segmentation: Expand your offerings to capture more customers

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Applying new pricing concepts to your product to convert interested leads into new customers is called segment-based pricing. This strategy utilizes different pricing techniques to attract potential customers and capitalize on interest that already exists for your product. Examples of segment-based pricing include leasing, bundling, rentals, and the development of completely new products. 

While many of the pricing methods that fall under this strategy are also examples of differential pricing (product bundling being a prime example), the idea is to use different options to gain new customers and grow the customer base. Think of ways you could change how the cost of your product is perceived. Is there an exceptionally basic version of your product that you could spin out from the enterprise version? Perhaps you could appeal to new customer segments by creating monthly and yearly memberships, or charging per-use fees to those who aren’t committed to owning your product and need to use it less often.

A great example of this is Mercedes who although known for really expensive cars has recently come out with a not cheap, but not expensive entry level car that more families can afford. You don’t need to build an entirely new car, but segment-based pricing will turn your leads into buyers because your company will have pricing options that change the perception of the cost, enabling potential customers to find a price that works for them.

Stop searching for the mythical, silver bullet price

Data can can help you significantly narrow the range of possible prices for your product and remove most of the guess work that comes with looking for the right price, but it’s important to take advantage of the results. Rather than obsessing about a perfect fixed price, focus on using multiple optimum price points to bring in new business and extract higher profits from your existing customer base.

With a multi price mindset, your company can adapt to the different pricing needs of your customers while encouraging them to spend more. The strategies that make up this approach will turn flexible value based pricing into an advantage that generates more revenue and stimulates the growth of your business.

To learn more, check out our Pricing Strategy ebook, our Pricing Page Bootcamp (it’s free!), or learn more about our price optimization software and solutions. We're here to help!


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